UK manufacturers are expecting to increase output in the coming months, according to the CBI survey. Photograph: Sean Smith for the Guardian

Factory orders rose at their highest pace in three years this month, although the CBI warned of "acute" inflationary pressures as manufacturers ramp up their prices.

The Confederation of British Industry survey's orders balance jumped to 5% in March from -8% in February, well above expectations of a reading of -6%. Firms are expecting to increase output in coming months, with that measure rising to 27% from 23%, the highest level since February 2007.

While the export orders balance fell back form 11% to 5%, it is still high by historical standards.

"The manufacturing recovery is picking up pace, with firms predicting robust output growth over the next quarter," said CBI chief economic adviser Ian McCafferty. "Inflationary pressures in the manufacturing sector remain very acute, as firms look to pass on sharply increased raw material costs," he said.

The gauge for domestic price expectations edged up to 33% in March from 32% in the previous month, hitting its highest level since July 2008, the survey showed.

"Nonetheless, there are still major doubts that a strong recovery in manufacturing will be enough to offset the negative effects of high inflation and the intensification of the fiscal squeeze on activity in the rest of the economy," said Samuel Tombs, UK economist at Capital Economics.

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